Page 40 - 2021 Atlanta Auto Show Guide

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any first year MBA students learn a marketing concept called

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M Mthe “Iron Law of Distribution.” The idea is that when you bring a
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product to market, you can change who owns the distribution channel
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for that product — but changing who distributes the product doesn’t
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By Jonathan Collegio
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NADA Senior Vice President change the cost structure associated with distributing the product. .
of Public Affairs
That is, you can change whether a factory or an independent to customers — in the exact same way that an independent
company owns the retail outlet — but that by itself doesn’t change distributor would incur costs.
or make retailing costs disappear.
In the automobile business, that means factories “selling direct”
This is a stumbling block for lots of factories that are looking would incur the costs of running a dealership. That is, they would
for ways to reinvent themselves. It’s also a huge source of incur the costs of buildings, land, equipment, inventory, insurance
misunderstanding for business reporters who cover companies policies, utility bills, and all the human capital needed to run the
seeking to “sell direct.” If factories own their own stores, the operation.
narrative goes, then there will be no “middleman,” their costs
and profits will go away, and the savings will get passed along And the auto dealership business is complex. Longtime auto
to customers. industry analyst Glenn Mercer calls the dealership business, “the
most complex retail business in America today.”
Except for the Iron Law. Changing retail ownership doesn’t
actually create any savings in and of itself, because the factory That’s because local dealerships don’t just sell new cars. They
store becomes the new “middleman.” The factory will need service them. They arrange financing for them. They handle
to make its own profits retailing. And worst of all, customers registrations and titles. They take trade-ins. They advertise and
are usually hurt when factories vertically integrate sales with collect sales data and customer lists. They often also sell used
manufacturing, because it raises prices by reducing retail price cars. This is another reality that gets completely lost in the “direct
competition. sales” debate: Dealerships take care of their customers for the
entire lifetime of the automobile across the entire automotive
The Myth of the Middleman ecosystem, not just the point of sale.
The fact is that when a factory decides to sell its products Manufacturers that experiment with selling directly always
directly to customers, they incur costs of selling those products eventually run into that reality. They always find that auto retail
38 GOAUTOSHOW.COM
38 GOAUTOSHOW .COM